By Megan O’Brien, finance and business editor
⏰ 7-minute read
- After news broke of a “Phase 1” trade deal between the U.S. and China, businesses are left wondering how the deal affects them specifically.
- The short answer: The deal doesn’t present much change for U.S. businesses (of a non-enterprise size,
- It’s still important, though, to consider what few effects the deal may have on your business in the short-term. And stay tuned, because more U.S.-China trade talks are coming.
China and President Trump signed “Phase 1” of a trade deal on Jan. 15. Immediately after, the media coverage and feedback started – some congratulatory, some critical and some thoroughly confused.
So, let’s cut through the clutter for a second and direct our focus to the tangibles as they relate to business. What does the China trade deal mean overall? What comes next? And how does it affect companies now?
Delving into “Phase 1” of the trade deal
After an 18-month trade war, the U.S. and China effectively called a partial truce and began the process to remedy relations. The deal signed last week by the world’s two largest economies entails the following:
The U.S. will continue 25% duties on about $250 billion worth of Chinese goods that are mostly utilized by manufacturers. Tariffs on approximately $110 billion of primarily consumer goods are still in place but were rolled back from 15% to 7.5%. President Trump stated that they would “all come off” after the two countries come to a more final agreement (though other administration officials have said that is not necessarily the case). The U.S. also agreed to forgo other planned tariffs, most notably the tariffs planned on $160 billion worth of Chinese goods consisting mostly of electronics.
However, it is worthwhile to note that there isn’t any clear-cut way to ensure that China (or the U.S. for that matter) complies with the agreed terms. If China reneges on its commitments made as a part of “Phase 1”, the U.S. may reinstitute the tariffs. And if the dispute cannot be resolved, more tariffs could be possible.
👉 In this phase of the trade deal, the only industries to get a break from tariffs are consumer goods -- tariffs were lessened on some of them -- and electronics, where some planned tariffs were declared a no-go.
In “Phase 1,” China will increase its purchases of U.S. products by $200 billion, which consists of $77.7 billion of manufactured goods, $37.9 billion of services, $52.4 billion of energy and $32 billion of agricultural products, over the next two years.
👉 China’s pledge to increase its U.S. imports should provide some relief for the farmers, manufacturers and others affected by the tit-for-tat tariffs of the U.S.-China trade war. However, since the majority of tariffs on both sides are still in place, this more serves to help recoup losses caused by the trade war than restore a competitive trading relationship.
A subset of the trade deal addresses intellectual property (IP) theft and enforcement, an issue that China’s oversea competitors have vocalized voraciously over the past several years. In CNBC’s 2019 CFO Survey, 21.7% of those surveyed said that Chinese companies had stolen their IP in the past year. And 30.4% stated that their IP had been stolen in the last decade.
The trade deal doesn’t articulate an official way to address this, but China has agreed to create an action plan with strong protections and punishments for IP theft within 30 days of the signing.
👉 While Chinese IP theft may not be a top concern for your company currently, it has cost the U.S. economy billions in revenue and thousands of jobs, according to some estimates. So, overall, cracking down on IP theft will help the U.S. business landscape and its innovation initiatives.
In the same vein of protecting corporate secrets, China has also promised to stop “forced technology transfers.” This practice has been a pain point for many companies as they have been pushed to share their tech as a price of doing business with China. Take for example the case in which a Chinese company debuted chemical products strikingly similar to those of DuPont, the major U.S. corporation, after DuPont shared its technology with a former Chinese partner.
👉 Under the trade deal, your company won’t have to share its tech with China. (And those that never were concerned about sharing tech can remain at ease.)
Under the Phase 1 of the trade deal, China will stop commanding U.S. companies to share their tech.
According to the agreement, “The Parties shall work constructively to provide fair, effective and nondiscriminatory market access for each other’s services and services suppliers.”
Financial services like banks, securities firms, insurance companies and credit unions have been pushing to enter the Chinese market. China announced it would lessen limits on foreign firms in its financial sector back in 2017. Since then, the country has taken significant steps towards financial inclusion – though challenges still remain. This part of the trade deal could serve as a reaffirmation of that commitment.
However, some the specifics should be noted. For instance, China agreed to “eliminate foreign equity limits and allow wholly U.S.-owned services suppliers to participate in the securities, fund management, and futures sectors.” But when it came to bank cards and payment systems, China agreed to accept license applications and respond promptly – it did not necessarily agree to allow entrance to the market.
👉 This trade deal should supplement previous Chinese concessions and benefit financial services firms looking to enter the Chinese market. However, that’s not for certain, considering the market’s ambiguity, regulations and level of competition.
Back in August 2019, the U.S. labelled China a “currency manipulator” – though it should be noted that this designation was not supported by the International Monetary Fund. The move, headed by President Trump, was based on the allegation that China had weakened its currency to make its goods cheaper to sell overseas. As a part of the trade deal, China agreed to be more transparent and not to devalue its currency for competitive purposes. In response, the U.S. removed China from its list of “currency manipulators.”
👉 Under the trade deal, your business should see less competition with Chinese companies.
Missing components of “Phase 1”
Critics of the first stage of the trade deal cite several integral missing measures.
Eswar Prasad, a Cornell University economist and former head of the International Monetary Fund’s China division, told the Associated Press, “The signing of the Phase 1 deal would represent a welcome, even if modest, de-escalation of trade hostilities between China and the U.S. But it hardly addresses in any substantive way the fundamental sources of trade and economic tensions between the two sides, which will continue to fester.’’
Again, the failure to discontinue high tariffs is the most significant missing part of this agreement. Tariffs on nearly $370 billion worth of Chinese goods – about three-quarters of Chinese imports – will still be in place. Additionally, China’s retaliatory tariffs on over $100 billion of U.S. goods will stay in place. Ultimately, consumers and businesses will still be dealing with the ramifications of these tariffs.
The other major missing aspect of the trade deal is the issue of China’s subsidies. Since joining the World Trade Organization (WTO) in 2001, China has been accused of subsidizing both private and state-owned companies to enhance their economic competitiveness. The WTO prohibits these actions, as they distort the market. The U.S. as well as the EU, Japan and Mexico have voiced disapproval over these violations, but they were not addressed in “Phase 1.”
Phase 1 of the U.S.-China trade deal is likely just that: a first phase signaling more talks are to come.
What’s next for U.S.-China trade and my business?
As you may have gleaned from the term “Phase 1,” this is just the beginning of the negotiations with China. President Trump has stated that he will go to China to continue the proceedings with “Phase 2.”
In terms of timing, don’t hold your breath. In a press conference with reporters at the White House, President Trump indicated that the conclusion may not come until after the 2020 election, stating, “We’ll start negotiating right away Phase 2. It’ll take a little time. I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.”
Experts estimate that little will change on the U.S.-China trade front based on the outcome of the election in November. While the political parties don’t tend to agree on how these trade talks occur, there is a general consensus that they need to happen in order to address China’s unfair trade practices.
The U.S. will likely continue to place pressure on China to ensure concessions and its participation at the negotiating table for “Phase 2” of the trade truce.
🌱 The bottom line
“Phase 1” of the U.S.-China trade deal is a step in the right direction for easing tensions and beginning negotiations. However, the majority of the thornier issues that affect U.S. businesses and consumers alike have been saved for “Phase 2” of the deal.